LGT Insurance-Linked Strategies (ex Clariden Leu ILS team) have held their quarterly managers update today in which they update clients on the state of the insurance-linked securities and associated insurance-linked investments market and their funds performance. It is the first quarterly update the team have presented in their new home at LGT having completed the move from Clariden Leu at the start of June.
Of particular note from the update are the thoughts of the LGT ILS on how capital market participation in the wider reinsurance market is likely to grow over the coming years. Everyone is predicting there to be increasing interest from capital market investors, a growing tendency for new reinsurers to operate a collateralized approach to investment backed underwriting and further growth of the catastrophe bond and ILS market, but few estimates have emerged. The LGT ILS team say that they expect significant growth of the insurance-linked investments universe in the coming years as the amount of capital markets participation in the reinsurance market increases.

At the 30th June 2012 the LGT ILS team estimate that the life and non-life reinsurance market was approximately $260 billion in size. Of that they see the insurance-linked asset class universe (so catastrophe bonds, insurance-linked securities and financial insurance contracts) accounting for 17%, with the remaining 83% being traditional reinsurance protection. The insurance-linked asset class is broken down into; 10% of the reinsurance market which is estimated to be ILS, catastrophe bonds and other insurance-linked instruments in securities form (so also including instruments such as embedded value, XXX, AXXX as well as sidecars and reinsurance programs which are in note form) and 7% made up of FIC’s.

By 2014 they estimate that the reinsurance market will have grown to $270 billion and expect the insurance-linked asset class to account for 22% total market, with the ILS, cat bond and other securitized instrument space growing to 12% and FIC’s increasing to 10%.

Then by 2016 they estimate that the reinsurance market will have grown further to $300 billion and that the insurance-linked asset class will now account for 25% of the life and non-life reinsurance market, with traditional reinsurance slipping to 75%. They expect ILS, cat bond and securitized insurance-linked assets to continue to contribute 12% of the now $300 billion total reinsurance market while FIC’s are expected to grow even further to 13%.

That is a decent amount of growth for a sector which continues to mature, create new risk transfer methods and innovate available investment options. The growth could be much larger if, for example, the longevity securitization market too off, or governments in developing nations adopted cat bonds for disaster risk financing. So in reality the figures while impressive could be conservative if product development within the capital market risk transfer sector matures further. The forecast from LGT suggests that there is plenty of room for new capital to continue to flow into the reinsurance space which is positive for investors still tentatively assessing the sector.

Other information of note in the update was a comment from Michael Stahel of LGT ILS on whether they would be reopening their conservative cat bond strategies to new subscriptions again. He said that they currently do not expect to reopen these conservative strategies apart from where redemptions occur, making some room to allow other investors to rebalance portfolios across the LGT funds. Their Luxembourg Conservative Plus cat bond fund remains open as well as their Guernsey ILS Plus fund. As we’ve written before here the team have been planning two new funds when market conditions allow.

On the outlook for the insurance-linked strategies asset class, the LGT ILS team say that they believe ILS remain an attractive investment proposition, continue to offer a low-correlation to other asset classes and the pricing environment remains attractive. How the market performs in 2013 will largely be driven by the loss experience over the remainder of this year, they say, but hope to have a better view on next year come the fourth quarter of 2012.